dilluns, 24 d’agost de 2015

The dream of a Spanish recovery

This post is based in two speeches made in Pescara and Warsaw recently.

1.- Introduction

In this presentation I will try first, to emphasize some of the structural characteristics  of the Spanish economy. Second, to discuss if the crisis in the Spanish economy is already finished or not, and if it has already overcome the historical problems which have limited its healthy and sound growth.

From 1960 the Spanish GDP per capita has quadrupled and has converged to the average of the euro zone although with cyclical swings:
-. converging from 1960 to 1975 thanks to the important relative increase of labour productivity;
-. diverging from 1975 to 1985, notwithstanding the relative increase of labour productivity, because of the significant loss of jobs produced by the crisis of these years;
-. converging again from 1985 to 2007 explained basically, and mainly from 1994, for the important increase of jobs; in the meantime the relative productivity of labour decreased;
-. and diverging again from 2007 with the current crisis due to the historical loss of jobs; at the same time, and thanks to the increase of the unemployed, the labour productivity has increased.


Then, the Spanish economy does not seem to be able to have at the same time an increase in the labour productivity and an increase in the creation of jobs which would lead to a more significant growth of the GDP per capita. Contrarily, it seems to have some correlation among the unemployment rate and the labour productivity for the whole period which seems especially intense in the periods of crisis.

2.- The onset of the Spanish economic crisis

Since 2008 the Spanish economy has suffered the effects of a major crisis, with a sharp drop in its GDP and per capita GDP, against a backdrop of significant economic imbalances and severe structural problems.


In fact, Spain’s real per capita GDP has fallen 8.1% between 2007 and 2014, which is more than the euro zone mean, and much more than in France and Germany.

In 2007, Spain’s unemployment rate was more or less at the level of that of other countries (8.2%), but in the crisis years it shot up dramatically so that by 2014 it stood at 24.3%, more than twice the rate of the rest of countries where it also increased slightly.

It has been estimated that probably it will take the Spanish economy more or less 25 years to get its unemployment rate back to pre-crisis levels.

There can be no doubt that the Spanish economy is experiencing its deepest crisis since the 1936-39 civil war.

A crisis that given its intensity and duration can be compared to the impact in Spain of the Great Depression of the 1930s. GDP per capita fell at the outbreak of the civil war, but it recovered much faster if we take into account that in the fifth year of the period it was higher than it had been in the initial year. In the 1929 crisis and in the current crisis, after seven years, the per capita GDP remained below the initial level. The current crisis therefore is characterised by its great intensity and duration, with an overall fall in per capita GDP of between 7 and 8% seven years after its onset. This has had a great impact on the rise in unemployment, the increase in poverty and the threat of the general deterioration and the collapse of public finances.

In the last three years of economic expansion the Spanish economy presented a public sector surplus; however, with the appearance of the crisis the public deficit grew rapidly peaking at 11% in 2009. Thereafter, the deficit remained high, finishing 2014 at 5.6% of GDP, well above the limit fixed by the European Fiscal Stability Treaty or the "fiscal compact".  Moreover, the Spanish deficit remained much higher than that of the other larger countries of the euro zone.

As a result, Spain’s public debt as a % of GDP, which was at a very low level in 2007, has increased much more rapidly than in any other country considered. In 2014 Spain’s public debt stood at more than 98% of GDP.

Private debt, on the other hand, has increased significantly and rapidly since 1999 reaching a maximum of 231% of GDP in 2010. Therefore, Spanish private debt is more than twice that of public debt. In comparison private debt in relation to GDP is more than 74% higher than the mean for the euro area and 92% higher than that in Germany.

Beyond doubt, the Spanish economy’s private debt has been one of the main causes of the crisis and remains one of the most important problems to be faced. As happened before 2008, one of the main symptoms of a looming crisis is rapid growth in private debt. These were exactly the circumstances that the Spanish economy, like many others, faced before the Great Crisis of 2008.

The causes of the crisis have been neither the public sector deficit nor the failure to implement "structural reforms" as it has been noted many times by the professor Alberto Bagnai. No less a figure than the vice president of the European Central Bank (Constâncio) has recognized that both: rising private debt levels and the lack of prudence and efficiency on the part of the creditors that caused this situation are at the root of the crisis in Europe.

In such circumstances, policies of "internal devaluation" offer no solution but rather create a vicious circle of increasing austerity. Yet, believing that the solution to the crisis faced by the countries of Europe is simply a matter of revoking the austerity measures and promoting expansionary policies is just a dream.

The existence of the euro – which means countries have neither their own currency nor the instruments needed for implementing their own sovereign economic policy – make this impossible.

In fact, an expansionary policy in the peripheral countries, in a situation of fixed exchange rates (because of the existence of the euro), would result in increasing problems of current account imbalances.

Bearing in mind that the current crisis is not a public debt crisis but one of external private debt, it seems logical that the priority of the economic policy should strive for equilibrium in the balance of payments (the so-called "External Compact") rather than equilibrium in the public sector balances (which is what the "Fiscal Compact" has tried to do, without much success). In fact, the proposal that international trade ought to be balanced, besides being logical, is not new: it was proposed by Keynes at Bretton Woods and it is also what Meade later proposed to ensure that economic integration might work.

3.- Is Spain Heading for a recovery?

Some “green sprouts” seem to grow in the Spanish economy.

Since the third quarter of 2013 the Spanish economy has not been in recession. Spain’s GDP is growing, very slightly, but there is growth. Even the forecasts from the IMF seem to indicate that the Spanish economy has been growing by 1.4% in 2014, a rate that is higher than the mean for the euro zone and similar to the mean for the EU as a whole. And it is forecast a higher growth in 2015 and 2016.

The number of unemployed and the unemployment rate have started to fall. However, unemployment stands at more than 5 million people and the unemployment rate at more than 22%.

Other “green sprouts” are a small and very recent recovery in the situation of :
-. the companies (investment demand, industrial production, turnover of the companies)
-. the demand of consumers (consumer credit, purchase of housing , purchase of automobiles, retail consume).

Undoubtedly, some external shocks are helping to what it seems an economic recovery, and particularly:
-. The decrease in the price of the barrel of petrol.
-. The depreciation of the euro in front of the dollar.
-. The OMT first and the QE after from the ECB.

At the same time, at the internal level, the austerity policies implemented, especially from 2010, -in addition to the negative consequences that they have produced- they have also created some conditions which probably have helped to this little recovery.
An important part of this recovery of the Spanish economy has been achieved  thanks to the austerity policies, to the “internal devaluation", to the labour market "reform", which has succeeded in moderating wages. There is little doubt that there has been a very severe "reform" of the labour market, which has meant cuts in wages, a significant reduction in unit labour costs for companies, a reduction in firing costs and a decrease in unemployment benefits, together with greater flexibility for companies in all collective bargaining procedures.

Consequently, during the crisis period, wages in Spain have been the lowest of the major countries of the euro zone and they have also shown the most moderate growth since 2009. As for nominal unit labour costs, these grew significantly throughout Europe until 2009 and since then they have continued to grow, albeit moderately. The differentiating factor is that since 2009 they have fallen markedly in Spain and as of 2014 the costs are one of the lowest of all the countries (with the exception of Germany).A fact that, given the moderate wage growth since 2009, can be explained mainly by the evolution of labour productivity which has risen sharply in Spain since the onset of the crisis. This large relative growth in Spain’s labour productivity can be explained mainly by the large loss of jobs and the consequent increase in the number of unemployed since the beginning of the crisis.

At the same time, the OECD indicators of employment protection legislation in the Spanish economy have fallen. Since 1995, the gradual liberalization of the Spanish labour market has placed it on a par in terms of flexibility with the average for the OECD countries and at a much higher level of flexibility –for the regular contracts- than that prevailing in the larger countries of the euro zone.

As Paul De Grauwe has pointed out, the internal devaluation (and especially “wage devaluation”) in the peripheral countries of the euro zone, and in Spain in particular, has been very intense. Moreover, a comparison with the countries at the core shows that the burden of the adjustments to improve the imbalances in the euro zone between creditor and debtor states has been highly asymmetric, with the peripheral countries being the ones that have had to suffer almost exclusively these adjustments, as has happened in other fixed exchange rate regimes, including that of Bretton Woods and the European Monetary System. Some believed that the European Monetary Union and the euro would change this behaviour, but it has not worked out like that: the adjustment process has been as asymmetric as in the other fixed exchange rate regimes.

Theoretically, the other element characterising the austerity policies has been the cuts in public spending designed to facilitate fiscal consolidation, with the consequent reduction in public deficit and public debt to the levels established by the Fiscal Stability Treaty.

There is no doubt that many public services have had to accept major cuts; however, public deficit has withstood these attempts at reduction and the public debt to GDP ratio has increased constantly. And from the onset of the economic crisis, Spain has not fulfilled by a long way the criteria established in the "fiscal compact", to the surprising condescension of the European Union.

It seems particularly clear that, besides the labour market reform, an important element in accounting for the recent moderate growth in GDP and the slight fall in the number of unemployed, is the sizeable public deficit that has maintained the Spanish economy in recent years. Contrary to the official line, in recent years Spain has implemented a relatively expansionary fiscal policy, which has given some support to the domestic demand or that, at least, has prevented it from falling further. The deficit of the Spanish economy has, since 2008, been much higher than the mean of the EU and the euro zone. At the same time, and because of the high public deficit, the public debt to GDP ratio has also increased very significantly and continuously, and today it has almost reached 100% of GDP.

In fact, the Spanish economy experienced a moment of crisis very dangerous, especially between 2011 and 2012, which coincided with a big rise in unemployment, a sovereign debt crisis with very high risk premiums on the public debt and the beginning of a profound crisis of the banking system.

The danger that the Spanish economy could get to the bankruptcy and to the need of a bailout as the Greek economy came to be very close, with a very important difference: the Spanish economy is much larger than Greece, and therefore, the consequences of such a situation could have on the whole euro zone and the euro itself would have been much more severe.

And in this context, it is probably legitimate to ask to what extent the European Commission (and the troika as a whole) did not allow that Spain maintained also a very important deficit to make a relatively expansionary fiscal policy, to prevent it from becoming a new Greece much more dangerous to the euro and by all euro area countries.

As Paul de Grauwe has noted, although the interest rate on Spanish government bonds has fallen, this does not mean that they have made the situation sustainable. Spain will face grave difficulties in turning its public debt around and will be obliged to introduce even stricter austerity policies. This in turn will further reduce the nominal rate of GDP growth plunging the country into a vicious circle that will be extremely difficult to break.

As for the current account balance, in Spain the deficit became larger and larger in the period of economic growth (based on the housing and financial bubbles), due to high import growth (which increased at a faster rate than GDP). This growth in imports and increasing private sector indebtedness were financed primarily with funds from abroad, and Spain recorded a historic current account deficit of almost -10% of its GDP in 2007.

With the onset of the crisis, and with it the application of a policy of "internal devaluation" Spain began to cut its imports significantly together with some reduction in private sector borrowing abroad.  Consequently, the current account balance, albeit still negative, gradually recovered until 2013 when it became a surplus. However, the first signs of a possible recovery have once again caused imports to rise and in 2014 the current account balance was back in deficit.

Based on these figures, the Spanish government, along with the European Commission and the IMF, have begun to speak of the great success story of the Spanish economy and of the effective policies they have promoted and implemented: they see this as evidence that competitiveness can be restored within the euro zone, and that it can start to grow again, based above all on increased exports, implementing policies of "internal devaluation" and fiscal consolidation. Furthermore, the Spanish economy is being held up as an example, as a model, of what other economies, particularly Italy and France, should do if they want a return to prosperity. Spain has become "the good boy" of the euro zone.

From a critical perspective, it is claimed that this is a mercantilist ("beggar-thy-neighbour") strategy, like the one implemented by Germany some years ago, and that it is not possible to apply it simultaneously in all European countries or throughout the euro zone, because there will always be winners and losers.

BUT, in the Spanish economy
There is “a dark side of the moon” related to:

-. The great unemployment and the structural problems in the labour market.
-. The retards in the relative provision of technological capital and in the R&D expenditures.
-. The retards in the relative provision of human capital.
-. The problems that represents the existence of the euro and concretely the loss of importance of industry and manufacturing in a context of lower growth and loss of competitiveness.

The unemployment rate in Spain is the second highest in the EU and the euro zone after Greece. It is more than twice -in the 2014, in the period of crisis and in the previous expansion- both in these areas as in the larger countries in the euro zone.
Moreover, it seems that the pace of GDP growth predicted cannot achieve to reduce it in a really significant amount.

Youth unemployment represents also another important issue, which in 2014 has a rate of over 50% and the average rate for the period crisis (2008-14) is approaching 45%.

On the other hand, it seems apparently a contradiction that, with an unemployment rate so high, the long-term unemployment in the Spanish economy is in the average of the euro area and below Italy. Moreover, despite an average unemployment rate at least twice as large, the average rate of long-term unemployment in the crisis period is the lowest of all countries and groups of countries considered.

However, the explanation of this phenomenon is a temporary employment rate much higher in Spain than in the other countries and, therefore, an upper rotation and volatility of the employees hired.

Moreover, the Spanish economy is a clear example of that the creation of employment (even a lot of employment) is not necessarily a synonymous with the decline in unemployment. Thus, between 1994 and 2013 in Spain the employment increased by more than 40% but the unemployment did it by more than 75%. In contrast, in Germany, Italy and France, the employment in the same period grew much less but the unemployment also rose much less or it decreased in the case of Germany.

In the case of Spain this is related to the great wave of immigration that arrived in the country during the expansion period but also, and mainly, on the type of productive specialization of the country, based on construction, tourism of masses, cheap services related to tourism and construction -that is, on unproductive sectors and little advanced technologically sectors-, and on the contrary it is not based on the most productive sectors and the most technologically advanced sectors in the industry and services.

So it is already clear the major problem that represents the unemployment, which has an important structural component. This structural unemployment, so high and persistent in absolute and relative terms, seems related to:
·         First, the type of specialization of the productive system of the country which is too much focused on sectors relatively unproductive and not technologically advanced.
·         Second, second, an education system unable to respond adequately to the needs of businesses as it has led to an excess of people who only have primary education (and with a major school failure) and to a lack of people with secondary education, specially on job training.
·         Third, a significant delay in the technology system and the innovation system of the country compared to the average of the euro area.

Then, one of the main structural problems of the Spanish economy is its technological retard, both with respect to the European Union and the major countries of the euro area and also as compared to the OECD:
-. The technological capital in relation to GDP is almost 30% below the euro area average.
-. The R & D expenditure of the Spanish economy are 40% below the average for the euro area and decreased clearly from the crisis. They are currently well below the EU average, the Euro zone average and the OECD average.
-. But the situation is even worse in R & D expenditures by companies, the private sector, because the Spanish R & D expenditure is done mainly by the public sector.
-. The same deficiency occurs when considering the number of researchers in % of the labour force.


Another important structural backwardness of the Spanish economy occurs in the provision of human capital endowments, because:
-. Human capital in relation to the working age population is 5% below the euro area average and its relative improvement is stagnant since 2005.
-. Meanwhile public expenditure on education relative to the working age population is even worse: a 22% below the euro area average and prone to decrease since 2009.


During the period of expansion that began in the mid 80s of last century, there has been growth rates higher before (1986-1999) than after the implementation of the euro (2000-2007). Moreover, there is a loss of weight of both the industrial production and the manufacturing production in France, Italy and Spain, and contrarily it has increased in Germany, especially after the outbreak of the crisis. Finally, the evolution of competitiveness (measured by the Real Effective Exchange Rate) has been negative, in absolute and relative terms, in relation to the euro zone, from 1999.

Eventually, to sum up, in this context the recovery of the Spanish economy does not seem to have a very solid base. The permanence of the structural problems of the economy (high structural unemployment; mismatch in the labour market; backwardness in the technological capital and the human capital adversely affecting productivity; the important problems of growth and competitiveness posed by the existence of the euro) as well as the fact that there has been no change in the predominant type of sectors in the economy, it does not permit much optimism regarding the possibility of achieving a strong and powerful economic growth without the problems and the limitations of the past.

Cap comentari:

Publica un comentari a l'entrada